1 Katalin Mérő 1 and Dóra Piroska 2 Banking Union and Banking Nationalism – Explaining Opt-Out Choices of Hungary, Poland and the Czech Republic Working Paper 1/2016 (February) http://www.ibs-b.hu/about-ibs/research ACKNOWLEDGEMENTS Earlier versions of this paper was presented at the International Workshop on Institutional and Policy Design in Financial Sector Reform, 25-26 September, 2015 organized by Koc University, Istanbul. We are grateful for the organizers and participants of the workshop, especially to W. Travis Selmier as well as to Júlia Király, Mária Móra, Judit Neményi, Magdolna Szőke and Éva Várhegyi who have reviewed earlier drafts of this paper. We are also thankful for all the interviewees we met. 1 Senior Research Fellow, International Business School, Budapest 2 Associate Professor, Department of International Studies, International Business School, Budapest
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Katalin Mérő1 and Dóra Piroska2
Banking Union and Banking Nationalism – Explaining Opt-Out Choices of Hungary,
Poland and the Czech Republic
Working Paper 1/2016 (February)
http://www.ibs-b.hu/about-ibs/research
ACKNOWLEDGEMENTS
Earlier versions of this paper was presented at the International Workshop on Institutional
and Policy Design in Financial Sector Reform, 25-26 September, 2015 organized by Koc
University, Istanbul. We are grateful for the organizers and participants of the workshop,
especially to W. Travis Selmier as well as to Júlia Király, Mária Móra, Judit Neményi, Magdolna
Szőke and Éva Várhegyi who have reviewed earlier drafts of this paper. We are also thankful
for all the interviewees we met.
1Senior Research Fellow, International Business School, Budapest 2 Associate Professor, Department of International Studies, International Business School, Budapest
supervision in Hungary as compared to the BU as a reason for opting-out7. Thus, it is the trust in national
institutions as opposed to international ones and avoidance of cumbersome policy coordination that are
used as the reasons for opting out.
In the course of the next few years, Orban’s initial openness disappeared, and the
government’s banking policy came to conflict with BU’s ideals. In the following, we analyze
those elements of the Hungarian government’s banking policy that provide particulars on the
existence of banking nationalism in all three area of banking policy: bank ownership, bank
regulation and bank supervision. We look at events that occurred between 2013 and 2015
around the time when the decision on the BU was made. We show why banking nationalism
cannot work properly within the BU.
After the GFC, the Fidesz-led Hungarian government declared several medium-term
aims in relation to re-shaping the banking sector’s ownership structure. It did so despite the
stabilizing role and strong commitment of foreign mother banks towards their Hungarian
subsidiaries during the crisis (Epstein 2014, Király 2015). According to Király (2015) the aims
were as follows: increasing the market share of domestic banks to at least 50 percent;
decreasing the number of large foreign banks on the Hungarian banking market; strengthening
the role of cooperative banks; strengthening the role of domestically owned small- and medium-
sized banks and establishing some new ones. The increase of public ownership in the banking
sector has not been part of the declared aims per se, however as intermediate objective to reach
the declared final aims, the Hungarian government’s bank ownership became significant in
sector.
The Orban government ambitiously started to implement these aims only after the
merging of the Hungarian Financial Supervisory Authority (HFSA) into the Matolcsy-led
central bank in 2013. The related steps are well-documented in the Hungarian press and in
Kiraly (2015). Here we just highlight some of them. The Hungarian state nationalized the fourth
largest bank (MKB). It purchased it from Bayerische Landesbank for 55 million euro in July
2014. In December 2014 the central bank (MNB), as the Hungarian Resolution Authority, took
MKB under resolution. The resolution was an opaque process however, several market rumors
talked about the cherry picking of MKB’s portfolio by businessmen close to the government.
During the resolution process, managed by MNB’s staff, a former Deputy Governor, Adam
7 More precisely, the paper draws attention to the fact that since 2013 micro and macro supervision is merged
into one institution in Hungary. According to the paper this organization allows better transfer of information as
it is possible within the BU, where microprudential supervision is delegated to the ECB, while the task of
macroprudential supervision is divided between the ECB and the designated national authorities within a highly
regulated framework of exchange of information and coordination.
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Balog, became the bank’s CEO. Several members from MNB’s staff –including former
supervisors- became the bank’s top or middle managers. Another upper medium size bank,
Budapest Bank, the commercial bank of GE Capital is now also under nationalization. These
nationalizations are declared temporary. However, the lack of transparency in these steps
questions the transparency of future privatization.
In 2013 and 2014 the Hungarian government increased capital in several small
Hungarian banks. One of them, Széchenyi Kereskedelmi Bank was 51 percent owned by István
Töröcskei, CEO of State Debt Management Company (ÁKK). Mr. Töröcskei resigned from
ÁKK only after the collapse of Széchenyi Kereskedelmi Bank in December, 2014. According
to a document owned by a Hungarian weekly (Máriás 2014) MNB was aware of the insolvency
of Széchenyi Kereskedelmi Bank in January, but it failed to act as the competent supervisory
authority until December. Another example for how the government influences who owns what
the in banking sector is the case of Növekedési Hitelbank (NHB). The bank was initially foreign
owned, but following some transformations, it was first bought by Hungarian businessmen and
today it is owned by Governor Matolcsy’s cousin.
Finally, two more examples that show the kind of relations the Hungarian government
prefers to establish with banks. The FHB Kereskedelmi Bank needed a capital increase in late
September 2014, since according to a law which entered into force on the 24th of September all
banks were obliged to convert the still existing FX loans to HUF and compensate borrowers for
the items which were declared unfair by the Hungarian High Court. The bank was loss-making
during the previous years, and the loss accumulated due to the new state measures would have
undermined its solvency. The bank’s main owner was a company owned by Zoltán Spéder, a
businessman with strong connection to Fidesz. On the 30th of September 2014 the state owned
Hungarian Post obtained 49 percent ownership in the bank. The case even raised the question
of forbidden state aid. As the president and CEO, Sándor Csányi announced at a conference,
OTP turned to State Aid Monitoring Office to investigate the case8.
The Hungarian Post was the protagonist of Takarékbank’s (the central bank of the
Hungarian cooperative banks) nationalization in 2013, as well (Várhegyi 2013). Together with
the Hungarian Development Bank, the two fully state-owned companies obtained the majority
of Takarékbank’s shares. Parallel to nationalization a new form of integration in the cooperative
banking sector was codified. According to the new regulation the integration’s members lost
their ownership control over Takarékbank. At the same time joining the integration became
8 Csányi Sándor’s lecture at the 53. Annual Conference of Economists, 03 September 2015. Referred by:
www.privatbankar.hu
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obligatory for all cooperative banks and for all those banks that were transformed to joint stock
banks from cooperative banks previously. This was required even if these later banks
voluntarily remained members of the predecessor of the cooperative banks’ integration. All the
cooperative banks had to adopt a new charter that was dictated by the new owner. The
Hungarian Financial Supervisory Authority (HFSA) “blackmailed” the cooperative banks that
it would withdraw their banking license if they did not accept the new charter that gave a wide
range of rights to Takarékbank. With this step, not only Takarékbank itself, but more or less the
whole cooperative banking sector, became nationalized (Király, 2015).
All the transactions and mergers described above required authorization from MNB.
The Matolcsy-led central bank issued all the necessary licenses for these transactions. In cases
of Banking Union members, authorization is the sole right of ECB. We could not find any
argumentation advanced by Hungarian politicians for opt-in vs. opt-out decisions that relates to
authorization. However the above cases show that having the freedom to re-shape the ownership
structure of the banking system also can be a strong motivation for opting out. More of our
interviewees confirmed, that the authorizations by MNB are generally “quick and dirty,” which
means that all the necessary licenses to fulfill the government’s aims are issued quickly without
questioning the transactions. Perhaps ECB licensing would raise more questions or would be
slower and maybe not so easily done. In all the above cases of authorization only staying outside
the BU can ensure the smooth authorization of ownership changes.
Besides re-shaping the ownership structure and the related authorization processes, we
found signs of banking nationalism in relation to regulation and supervision, as well. In this
area, the special treatment of the Hungarian national champion, OTP Bank has to be mentioned.
OTP has more than 20 percent market share in Hungary, and it has a significant East European
subsidiary network. However it is a small bank in the scope of Europe generally. Accordingly
the supervision of OTP is an outstandingly important task for MNB. In case of opt-in OTP
would be supervised by the ECB and it would become a small individually-supervised bank
with less specific, tailor made supervisory attention. OTP is definitely a too-big-to-fail,
systemically important bank in Hungary, which explains the special regulatory and supervisory
interest. To be nationally regulated and supervised is good for the bank, for the Government
and for MNB. The very close connection of regulators, supervisors and the bank is testified by
the fact that several former regulators and supervisors continue their career with OTP group
after resigning from their position. These officials include the Finance Minister, the State
Secretary of Ministry of Finance, the President of the HFSA, the deputy CEO of the HFSA, and
several top and middle managers of HFSA.
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An example of the advantages being domestically supervised is the case of Asset Quality
Review (AQR). Before joining the BU all the EMU member states had to conduct an asset
quality review in line with ECB’s methodology. ECB’s AQR was done by large audit
companies under the strict supervision of competent national supervisory authorities, though
paid and quality-checked by the ECB. In order to maintain a good reputation and shareholders’
trust, OTP voluntarily underwent a very similar AQR. Upon receiving the AQR results, OTP
issued an extraordinary announcement: “the AQR process found only minor deviations and
deficiencies, which did not require any modification either in the Common Equity Tier One
(CET1) capital serving as a base for stress test or other parameters” (OTP 2014). The successful
AQR was good not only for OTP, but for MNB, as well, since it also could communicate that
the national champion is stable and appropriately supervised.
However, despite strong similarities, one can identify several important differences
between the AQRs of banks inside the Banking Union and the AQR of OTP. In both cases, the
competent national authorities were responsible for AQR, and the review itself was made by
selected large audit companies. In case of BU member states, AQR was paid and quality
checked by ECB. In case of OTP it must have been domestically paid (in principle by OTP or
by MNB; but more probably by OTP) and quality checked by MNB. Even if the audit company
and MNB tried to mirror the methodology and check ECB’s mechanisms, the AQR could not
be identical, but only highly similar to ECB’s. However, the lack of ECB’s quality checking
and the domestic finance of AQR, by definition, meant that the level of independence and
objectiveness of AQR was not identical. Since the interest of both OTP and MNB was a
successful AQR, which did not cover hidden asset quality problems, ECB’s quality check
would have been a very important element of the procedure.
Another advantage of staying outside the Banking Union is the possibility of conducting
the Supervisory Review Process (SREP) and imposing fines domestically. In the SREP
framework a dialogue takes place between the banks and the supervisors, which results in
determining the Pillar II capital requirement of the given bank. In case of BU members, the
decision on the SREP capital requirement is made by ECB, while in case of non–BU members
by competent national supervisory authorities. The SREP capital requirement is a very sensitive
question, because it can significantly increase the banks’ capital requirement. For banks with
good connections to supervisory authorities the SREP can be relatively lighter. Moreover, the
SREP process is a useful tool for supervisors to follow their preferences or even to punish banks
not in line with the supervisory (and/or governmental) preferences. According to our
interviewees and market information MNB is not averse to use the SREP as a tool for the
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enforcement its own (and the governments’) preferences. The fine imposed by MNB on the
banks increased significantly since MNB merged the HFSA. According to MNB (MNB 2015)
this is a result of a deliberate policy. However, more and more banks perceive the extremely
high fines as unfair and appeal against the decision at the court.
As regards bank regulation, several special bank regulatory tools were introduced since
2010. They are partly macroprudential tools (Mero and Piroska 2015), partly tools that handle
those households’ losses, that became indebted in FX before the crisis and partly tools that aim
to increase fiscal revenues and take the form of different taxes (Várhegyi 2012). The latter
would not clash with the BU. Since there is no single taxation mechanism in the EU several BU
members introduced and operate different types of bank levies and taxes. However, MNB’s
macroprudential tools would become weaker within the BU. According to MNB’s fears
(Kissgergely and Szombati 2014, pg. 17) one “cannot be sure that the problems of smaller, non-
euro area Member States will be taken as seriously as those of key Banking Union members
with a more significant banking sector.” In addition, MNB’s management is also wary of the
possibility of losing its ability to set extra requirements for systemically important subsidiaries
of banking groups that are directly supervised by the ECB. Being able to retain the right to set
independent domestic macroprudential rules that are also thought to be superior to ECB’s
regulation is a key element of MNB’s opt-out position.
Moreover, we can identify other regulatory steps that are in line with the Hungarian
government’s banking nationalism and should result in clash with the BU. A prominent
example is the case of 3 those 100 cooperative banks that with good connections to the
government could avoid nationalization. Out of more than 100 Hungarian cooperative banks
there were only five that could avoid the obligatory integration and nationalization of the
cooperative banking sector, due to a special regulation. The Act on the integration of
cooperative banking sector contained a special paragraph that allowed exemption for those
cooperative banks that applied for authorization of transforming their corporate form from
cooperative to joint stock banks. At the time the relevant law was adopted by the Parliament it
seemed that its aim was to give an escape route to Duna Takarék, the cooperative bank that
belonged to a close friend of the Prime Minister, István Garancsi. As a free rider, another small
bank, Polgári Bank, could follow the example of Duna Takarék. However, the President of
Hungary did not sign and issue the law, but sent it back to the Parliament for deliberation. This
step postponed the adoption of the law. During the period of deliberation by the Parliament
three additional cooperative banks applied for authorization of their transformation to joint
stock banks; consequently by the time of the law entered into power they escaped the scope of
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the law. All three cooperative banks together with the DRB Bank, a small joint stock bank that
should have been part of the integration, belonged to the Buda Cash group, a group with very
good government connections. The DRB Bank applied for authorization by MNB to exit from
the integration and MNB accorded it to the bank in late 2013. The three cooperative banks also
got authorization for transformation, so they could continue to work in close cooperation in the
Buda Cash group framework. The four Buda Cash banks, together with their mother investment
company, became bankrupt in early 2015.
Another example of amending an act just for enforcing the government’s will is the
amendment of the Act on MNB in July 2015. The aim of amendment was to permit the
appointment the deputy governor of MNB for CEO of the MKB Bank. The amendment
overstepped the conflict of interest rules, which in their original form would encumber the
appointment of the deputy Governor to a commercial bank’s CEO. According to the
amendment, the rules shall not be applied for “membership or shareholder relationship,
employment relationship or any other work-related relationship, executive officer relationship,
supervisory board membership with any of the entities in which the Hungarian State or MNB
holds a controlling share…”.
7. Examples of banking nationalism from the Czech Republic and Poland
In this section, we would like to show a few examples as for why banking nationalism defines
these countries’ interest as to stay outside the Banking Union.
The Czech and the Polish banking sectors are the healthiest in CEE, since they
accumulated relatively few nonperforming loans and their profitability has remained
continuously high. This is the case because neither the Czech nor the Polish banking systems
were seriously hit by the GFC. Both governments are convinced that it is the result of high
quality of domestic banking policy and especially supervision.9 Accordingly, both governments
argued that joining the BU is not important for their countries. There is no need to increase their
domestic banking systems’ credibility, since they are more stable and credible than their
Western European counterparts. Furthermore, contributing to the European Single Resolution
Mechanism seems unnecessarily burdensome to these countries.
9 Sylvia Maxfield and Mariana Magaldi de Sousa led an investigation into the similar claim of Latin American
governments and found out that instead of the claim of superior supervisory capacity the reason behind the fact
that Latin American banks were not so badly hit by the crisis was a lower level of internationalization of these
banks. (Maxfield et al. 2014)
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In a Financial Times interview, Marek Belka, the Governor of National Bank of
Poland10 stressed the superiority of nationally managed macroprudential policy to ECB
managed one as the main reason for opting out. The fewer rights in decision-making (lack of
representation in Governing Council of ECB) of non-Euro area countries are also among the
most frequently emphasized arguments. When presenting the Czech position on the Banking Union,
Mojmir Hampl, vice governor of Czech National Bank pointed out that during the crisis there was no
need to channel public funds to the banks, and that the Czech Republic did not join the Vienna Initiative,
an IMF supported agreement among CEE governments and Western mother banks to maintain liquidity
in CEE host markets during the crisis (Hampl 2015). Both Hampl and Singer, the Governor of the CNB
claimed that they did a better job prior and during the crisis than Western European supervisors. In
Poland both Mateusz Szczurek (Minister of Finance) and Marek Belka (Governor of the National Bank
of Poland) argued for opt-out, mainly because of the non-equal treatment of the euro area and non-euro
area banks, since the later have no access to ECB’s liquidity facility and have no representation in the
Governing Council of ECB (Profant and Toporowsky 2014)11. Besides the high stability and good
performance of Polish banking system, the low level of financial intermediation and the lack of
sophisticated structured products – they argued - also serve as an argument for opting-out (Kawalecz
2015).
However, arguments regarding the soundness of banking in these countries are
backward looking and implicitly contain the unjustified assumption that the future probability
of banking crises and the related resolution costs will be also lower in these countries than in
Eurozone countries. That is why it seems that reasons for opting out are rather based on the
doubts in relation to the functioning of Single Supervisory Mechanism (SSM). As we argue
giving up supervisory control is not the preferred choice of the banking nationalist Czech and
Polish governments. Staying in control allows these governments space for maneuvering that
they can utilize in their special position of state capture.
In the case of Poland, similarly to Hungary, restructuring bank ownership needs a
smooth authorization procedure, which is much easily feasible under domestic supervision.
Polish policymakers and even the Governor of the central bank declared that the banking
system’s “domestication” would be useful for effective and well-functioning banking12. One of
the very first steps in domestication was the conditional authorization of acquisition of a Greek-
owned Polish bank by Raiffeisen Bank in 2012. The condition was that by mid-2016 either
10 http://www.ft.com/cms/s/0/ba6537d2-5905-11e4-a722-00144feab7de.html#axzz3yCOBiDfQ 11 http://www.reuters.com/article/poland-cenbank-idUSL6N0O72FS20140521 12 see for example: http://www.nbp.pl/homen.aspx?f=/en/aktualnosci/2011/mpc_2011_11_09_rel.html , and
Raiffeisen International lists its shares on the Warsaw Stock Exchange or 15% of its Polish
subsidiaries will be listed in form of IPO. At the end of 2015 Raiffeisen announced that it
intended to sell the Slovenian and Polish subsidiaries. However, the Polish Supervisory
Authority insisted on conducting the IPO by Raiffeisen before authorizing the sale of the Polish
operation. As a consequence Raiffeisen undertakes an IPO and a sale simultaneously, which is
not the most logical and effective way to find a new owner.13 More importantly, this kind of
authorization would most probably have been different if exercised by ECB. As the new Polish
government elected in 2015 strengthened its commitment towards increasing Polish ownership
in banking, further authorization in favor of domestic owners are expected.
Regarding the Czech Republic there were neither similar actions nor declarations in
favor of Czech ownership in banking. However the ring-fencing of foreign capital in banking
is the strongest there in the whole of Central and Eastern Europe. The signs of ring-fencing are
the early introduction of capital conservation buffer; the countercyclical capital buffer’s
elevation from zero percent to 0,5 percent; and the introduction of systemic risk buffer for the
four largest banks in a range between 1 to 3 percent. These capital buffers are in line with the
CRD regulatory framework. However, they are outstandingly high relative to the rest of
Europe14 and their calibration definitely aims not only to increase banks’ stability, but also the
ring-fencing of foreign capital invested in the Czech subsidiaries. Although ring-fencing is
possible even within the Banking Union, this high level of its usage by Czech policy makers
would surly raise more questions by ECB.
8. Conclusions
Banking Union is not only the European answer to the financial crisis, but it is also a significant
step towards deeper integration. Yet, Banking Union is not complete, and it also is not appealing
for all EU member states. Understanding why three Central and Eastern European governments
opted out may help us better understand the dynamics of EU integration in other policy areas
as well.
In this article, we looked for reasons why three out of five CEE countries opted out of
the Banking Union. We analyzed structural explanations and characteristics of the CEE5
banking systems and found that there are no structural reasons for the in or out choices. The
structures of the CEE5 banking systems are highly similar, and there is no structural dividing
13 http://uk.reuters.com/article/uk-raiffeisen-poland-exclusive-idUKKBN0ND2BZ20150422 14 The level of buffers applied by different European countries can be found at the ESRB homepage: